ASSIGNMENT 1: CURRENT LIABILITIES

Accounting 240: Financial Accounting, Part II

Problem 1: Current and noncurrent liabilities
You were able to obtain the following from the accountant for Florivel Corporation related to the
companys liabilities as of December 31, 2010.
Accounts payable
Notes payable trade
Notes payable bank
Wages and salaries payable
Interest payable
Mortgage notes payable 10%
Mortgage notes payable 12%
Bonds payable

P 650,000
190,000
800,000
15,000
?
600,000
1,500,000
2,000,000

The following additional information pertains to these liabilities:

All trade notes payable are due within six months from the end of the reporting period.
Bank notes payable include two separate notes payable to Allied Bank.
o A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable
every six months.
o A 1-year, P500,000, 11% note issued January 2, 2010. On December 30, 2010, Florivel
negotiated a written agreement with Allied Bank to replace the note with a 2-year,
P500,000, 10% note to be issued January 2, 2011. The interest was paid on December
31, 2010.
The 10% mortgage note was issued October 1, 2007, with a term of 10 years. Terms of the note
give the holder the right to demand immediate payment if the company fails to make a monthly
interest payment within 10 days of the date the payment is due. As of December 31, 2010,
Agdangan is three months behind in paying its required interest payment.
The 12% mortgage note was issued May 1, 2004, with a term of 20 years. The current principal
amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of
P220,000 is due April 30, 201. The payment includes interest of P180,000.
The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semiannually every June 30 and December 31.
Based on the information above, answer the following:
1. What is the amount of the total current liabilities?
2. What is the amount of the total noncurrent liabilities?

Problem 2: Warranty and premium

Karlyzels Music Emporium carries a wide variety of music promotion techniques warranties and
premiums to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso
spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM
radio. Karlyzel pays P34 for each radio and estimates that 60% of the coupons given to customers will be
redeemed.
Karlyzels total sales for 2010 were P57,600,000. P43,200,000 of which were from musical instrument
and sound reproduction equipment, and P14,400,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totalled P1,312,000 during 2010. A total of 52,000 AM/FM
radio used in the premium program were purchased during the year and there were 9,600,000 coupons
redeemed in 2010.
The accrual method is used by Karlyzel to account for the warranty and premium costs for financial
reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2010
were as shown below:
Inventory of Premium AM/FM radio
Estimated Premium Claims Outstanding
Estimated Liability from Warranties

P 319,600
358,400
1,088,000

Based on the information above:

1. Journalize all transactions involved; and
2. Determine the final amounts that will be shown on the 2010 financial statements for the following
accounts:
o Warranty expense
o Estimated liability from warranties
o Premiums expense
o Inventory of AM/FM radio
o Estimated liability for premiums

Problem 3: Provisions and contingent liabilities

The following information relates to Alabat Company as of December 31, 2010. Answer the following
questions relating to each of the independent situations as requested.
1. Beginning 2010, Alabat Company began marketing a new bear called Red Colt. To help
promote the product, the management is offering a special beer mug to each customer for every
20 specially marked bottle caps of Red Colt. Alabat estimates that out of the 300,000 bottles of
Red Colt sold during 2010, only 50% of the marked bottle caps will be redeemed. For the year
2010, 8,000 ugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs
were already distributed to customers.
What is the amount of the liability that Alabat Company should report on its December 31, 2010
statement of financial position? Journalize.
2. On January 2, 2008, Alabat Company introduced a new line of products that carry a three-year
warranty against factory defects. Estimated warranty costs related to peso sales are as follows:
1% of sales in the year of sale, 2% in the year after sales and 3% in the second year after sale.
Sales and actual warranty expenditures for the period 2008 to 2010 were as follows:

2008
2009
2010

Sales
P100,000
250,000
350,000

Actual Warranty Expense

P

750
3,750
11,250

What amount should Alabat report as warranty expense in 2010? Journalize.

3. During 2010, Alabat Company guaranteed a suppliers P500,000 loan from a bank. On October 1,
2010, Alabat was notified that the supplier had defaulted on the loan and filed for bankruptcy
protection. Counsel believes Alabat will probably have to pay between P250,000 and P450,000
under its guarantee. As a result of the suppliers bankruptcy, Alabat entered into a contract in
December 2010 to retool its machines so that Alabat could accept parts from other suppliers.
Retooling costs are estimated to be P300,000.
What amount should Manfred report as a liability in its December 31, 2010, statement of financial
position? Journalize.
4. A court case decided on December 21, 2010 awarded damages against Alabat. The judge has
announced that the amount of damages will be set at a future date, expected to be in March
2011. Alabat has received advice from its lawyers that the amount of the damages could be
anything between P20,000 and P7,000,000.
As of December 31, 2010, how much should be recognized in the statement of financial position
regarding this court case? Journalize.

5. Alabats directors decided on November 3, 2010 to restructure the companys operations as

follows:
Factory T would be closed down and put on the market for sale.
100 employes working in Factory T would be retrenched effective November 30, 2010 and
would be paid their accumulated entitlements plus 3 months wages.
The remaining 20 employees working in Factory T would be transferred to Factory X, which
would continue operating.
5 head-office staff would be retrenched effective December 31, 2010 and would be paid
their accumulated entitlements plus 3 months wages.
As at December 31, 2010, the following transactions and events had occurred:
Factory T was shut down on November 30, 2010. An offer of P80 million had been received
for Factory T, however there was no binding sales agreement.
The 100 employees that had been retrenched, had left and their accumulated entitlements
had been paid, however, an amount of P1,520,000, representing a portion of the 3 months
wages for the retrenched employees, had still not been paid.
Costs of P460,000 were expected to be incurred in transferring the 20 employees to their
new work in Factory X. the transfer will occur on January 15, 2011.
Four of the five head office staff had been retrenched, had left, and their accumulated
entitlements, including the 3 months wages, had been paid. However, one employee, D.
Terminator, remained on to complete administrative tasks relating to the closure of Factory
T and the transfer of staff to Factory X. D. Terminator was expected to stay until January
31, 2011. D. Terminators salary for January would be P80,000 and his retrenchment
package would be P260,000, all of which would be paid on the day he left. He estimated
that he would spend 60% of his time administering the closure of Factory T, 30% of his time
administering the transfer of staff to Factory X and the remaining 10% on general
administration.
Calculate the amount of the restructuring provision to be recognized in Alabats financial
statements as at December 31, 2010. Journalize.